Feds put Apple on trial over e-books, starting Monday

Apple is accused of colluding to keep prices higher than Amazon's $9.99.

Over a year ago, the Department of Justice filed an antitrust lawsuit against six major book publishers and Apple. One-by-one, the publishers settled with the government, with the final publisher (Macmillan) agreeing to terms in February 2013. But there remains one major holdout: Apple itself.

In court documents filed earlier this month, the government accused Apple of being the “ringleader” in the scheme. The case, US v. Apple et al., is now set to go to trial in New York City on June 3, 2013. Ars will cover opening statements from the Manhattan courtroom on Monday morning.

Prosecutors (along with European investigators) charged that when the iPad was introduced in 2010, Apple signed special deals with publishers that “caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid," according to the initial legal filing. The publishers simultaneously switched to the “agency model,” which allows the publishers (rather than the seller) to set their own prices on e-books.

As a result, the publishers could end price competition among retailers and raise the prices consumers pay for e-books through the adoption of identical pricing tiers. This change in business model would not have occurred without the conspiracy among the Defendants.

Apple has continued to strongly deny the allegations. In its own May 2013 filing (PDF), Apple said the government cannot prove the existence of a conspiracy and that "Apple was neither involved in nor aware of the alleged conspiracy among the publishers."

In a highly unusual move, the federal judge who will decide the case—there will be no jury—has already indicated her willingness to side with the government.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books and that the circumstantial evidence in this case, including the terms of the agreements [between Apple and publishers], will confirm that," US District Judge Denise Cote said during a pretrial hearing last week, according to Reuters.

Should Apple lose the case, it would be another slap on the wrist to the company in the court of public opinion—Apple was slammed recently in Congress for its financial shenanigans, and in years previous for abuse of its contracted workers at its China and Taiwan-based factories. Still, Apple's bottom line doesn't seem to have suffered much: it made $41 billion in net income in the fiscal year 2012.

Cyrus, one nit to pick: Apple actually wasn't slammed in Congress over its tax policies (if you had actually watched the C-SPAN coverage you might have been mistaken that Tim Cook had been called to Congress to accept an award for being great). It was "subtly" reminded to begin paying more for lobbying and maybe hire an ex-Congressperson or two to lobby on its behalf like a good American business.

Cyrus, one nit to pick: Apple actually wasn't slammed in Congress over its tax policies (if you had actually watched the C-SPAN coverage you might have been mistaken that Tim Cook had been called to Congress to accept an award for being great). It was "subtly" reminded to begin paying more for lobbying and maybe hire an ex-Congressperson or two to lobby on its behalf like a good American business.

Cyrus, one nit to pick: Apple actually wasn't slammed in Congress over its tax policies (if you had actually watched the C-SPAN coverage you might have been mistaken that Tim Cook had been called to Congress to accept an award for being great). It was "subtly" reminded to begin paying more for lobbying and maybe hire an ex-Congressperson or two to lobby on its behalf like a good American business.

Cyrus, one nit to pick: Apple actually wasn't slammed in Congress over its tax policies (if you had actually watched the C-SPAN coverage you might have been mistaken that Tim Cook had been called to Congress to accept an award for being great). It was "subtly" reminded to begin paying more for lobbying and maybe hire an ex-Congressperson or two to lobby on its behalf like a good American business.

Lobbyists are the glue that makes this Country run so smoothly. They ensure that Capitalism works by providing homes for Congress Critters when they are no longer electable, and a new batch of candidates already versed in how America works. If you're against lobbyists, you're against Capitalism. You don't hate Capitalism (and by extension America)...do you?

why would they collude to keep prices higher? wouldnt that drive business to the competitor? i'm not a business minded person nor did I pay any particular attention to this saga. was this just in markets that amazon was not in?

Six major book publishers (and Apple) where in on this -- where do you think Amazon gets their books from? The publishes would not let Amazon under cut Apple on prices because the publishes would set the prices for eBooks, not the sellers (eg: Amazon, B&N, etc.)

why would they collude to keep prices higher? wouldnt that drive business to the competitor? i'm not a business minded person nor did I pay any particular attention to this saga. was this just in markets that amazon was not in?

Six major book publishers (and Apple) where in on this -- where do you think Amazon gets their books from? The publishes would not let Amazon under cut Apple on prices because the publishes would set the prices for eBooks, not the sellers (eg: Amazon, B&N, etc.)

How is it that Apple thinks they can win this? Haven't all of the publishers they colluded with already settled and by doing so admitted at least some validity to the claim?

That's a bit of legal trickery. As long as they didn't admit any guilt in the settlements, the act of settling generally cannot be legally construed as evidence of anything.

Settlement costs can be significantly lower than litigation costs so companies will often pay up without admission of guilt and call it a day. The problem is that guilty parties can also take settlements without admission of guilt and get away with a comparative slap on the wrist.

Is Apple's unwillingness to admit mistakes a product of their PR strategy or delusion?

Just like the iPhone 4 antenna, sometimes it's just better to apologize, solve, and move on.

While an ingrained sense of elitism is part of Apple's marketing direction, not apologizing for screw ups is a far more systemic issue across every industry. It stems from the tendency to litigate fuckups. Of course, multiple studies have shown if people just admit to fucking up sooner than later and fix it, legal liabilities go down.

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

How is it that Apple thinks they can win this? Haven't all of the publishers they colluded with already settled and by doing so admitted at least some validity to the claim?

There are publishers that settled and, in doing so, explicitly denied any involvement in collusion, giving their reasoning as it was far cheaper to settle than to fight the government on it.

Despite the polarization of the camps on whether or not Apple is guilty, it's a legal gray area.

This all boils down to intent of the involved parties.

It's already been stated that Amazon was purchasing ebooks wholesale for $12.99 from at least one major publisher and selling at $9.99, a price that none of their competitors at the time could compete with (and not sustainable unless they forced the publishers to set wholesale prices even lower, which could only happen if they had the leverage of no real competition in the market). I believe B&N had publicly sided with Apple and the publishers on Amazon's actions being wrong but that's another discussion.

So in perspective of the wholesale book cost being $12.99, and Apple setting prices at $12.99 or $14.99, I believe their intent was to pass the price on to consumers with no or slim margins on the wholesale cost. Unfortunately, the MFN clause of their contract all but guaranteed that publishers were going to force the agency model on Amazon or find some other method of setting the prices higher. The publishers could've let Amazon keep selling at $9.99 but then Apple would've been able to override the publisher set price in order to match. Also, there was nothing stopping the publishers from offering the e-books at a lower cost and making them $9.99 themselves; under the agency model, the publishers are in direct control of the pricing, they could sell for as low as $0.99 if they wanted to.

The DOJ has to prove that the terms of the contract and the negotiations prove collusion. I would guess Apple's argument will be that they use the agency model in other markets without issue and that they do not control the pricing, the content owners do.

This could easily go either way, despite the initial statement by the judge. I am personally of the opinion that Apple did not intentionally collude but that they may have inadvertently done so in the manner of their negotiations (again, this all comes down to intent) and I've seen legal precedents both in favor and against but this is still a relatively new market and manner of doing business and the digital marketplace is very different from the physical marketplace. What's clearer, though, is that this trial will have a long-lasting precedent on the sale of digital goods going forward. I'm not sure whether that's good or bad at this point.

why would they collude to keep prices higher? wouldnt that drive business to the competitor? i'm not a business minded person nor did I pay any particular attention to this saga. was this just in markets that amazon was not in?

When Apple introduced the iPad, using it as an e-reader was a fairly obvious thing to do. So Apple and the publishers worked out this Agency model thing, and the publishers then turned to Amazon and said "we want that."

Amazon said, "we're quite happy doing business the way we are, thanks." So several publishers stopped selling books on Amazon until Amazon relented and also signed a new distribution deal that gave the publishers the same Agency model.

Keep in mind that publishers have a monopoly on their own titles; so after the Agency model thing came in to play, I am assuming this new model applied to *all* of the e-book stores: Amazon, Barnes & Noble, Apple, Sony, etc.

What happened here was that the publishers have moved the business model from something where the retailer pays the publisher a fixed price and then charges whatever they want to a model where the retailer has no control over pricing.

In the meantime, Apple has forced Amazon to take out the ability to purchase books via the Kindle app. So now it's far more convenient for Apple users to buy e-books on Apple's bookstore than through Amazon.

Put all this together, and you have a lot of people crying foul: that Apple and the publishers engaged in price fixing. The publishers have all settled out of court, presumably because settling is cheaper than fighting it, and Kindle and Nook users all got a few dollars in their accounts as compensation. I think I got around $3 in each.

So there's what I know; I hope that was a neutral enough account to not spark debate over the issue. =)

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

Yeah, even $10 is more than I want to pay, most of the time. I find that $5-6 is much more comfortable for me, and I will often skip $8 books, unless it's part of a series I'm already reading or from an author I know I'm going to like.

"I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books and that the circumstantial evidence in this case, including the terms of the agreements [between Apple and publishers], will confirm that," US District Judge Denise Cote said during a pretrial hearing last week, according to Reuters."

Funny thing Apple users can't seem to distinguish. The difference between being against Apple and following the facts. The statement says one and one thing: The she believes the government will prove its case. Nothing more, nothing less. Its just that its against Apple so obviously the person HAS to be biased.

The only question is if apple got all this through illegal collusion. The government has to show that they did that. But at least from the Jobs Murdock emails it seems that the negotiations were one-on-one.

I hope the DOJ has more than that. Maybe well get some wiretaps or grainy video

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

Yeah, even $10 is more than I want to pay, most of the time. I find that $5-6 is much more comfortable for me, and I will often skip $8 books, unless it's part of a series I'm already reading or from an author I know I'm going to like.

For me, it depends on the context. I don't mind paying around $10 for a new release but I find it ridiculous that back catalogs are sold for higher than their mass-market paperback price, not to mention that I can easily find most of those titles at used bookstores for much less and then, can even resell to recoup some of an already cheap price.

For older titles, anywhere between $3 and $7 should be the range, imo. Hopefully the publishers have sense and start to offer pricing in this range.

The whole problem with music piracy started because CDs retained a high market price even though the technology became cheaper over time. If CDs had naturally gone down in price as the tech became more affordable and were priced even in the $5-10 range, then I think music piracy would've remained a more underground concept and would not have become so mainstream.

There's a lesson to be learned there for publishers because ebooks are much easier to pirate. The only thing stopping e-book piracy from being more widespread is that e-book readers are still fairly new and that existing pirated content is awash with editing and layout errors from fan-OCRed versions.

Is Apple's unwillingness to admit mistakes a product of their PR strategy or delusion?

Just like the iPhone 4 antenna, sometimes it's just better to apologize, solve, and move on.

I wonder if Apple is doing the same thing in other areas besides books. That would mean that admitting guilt or losing here would subject their other business practices to similar scrutiny. They'd be closely watched by the government going forward - just as Microsoft was and probably still is after the anti-trust case.

I can't imagine that books are a huge part of Apple's success, especially given their well established competition. Why would one buy a book from Apple when they can buy it from Amazon and read it not only on their iPad, but also on a Kindle device, Mac or Windows PC, phone, etc. This in particular makes me think they're more worried about an investigation carrying over into other products beyond books.

The only question is if apple got all this through illegal collusion. The government has to show that they did that. But at least from the Jobs Murdock emails it seems that the negotiations were one-on-one.

I hope the DOJ has more than that. Maybe well get some wiretaps or grainy video

Do you have a source concerning Amazon pursuing the agency model? I've been following this story for awhile and this is the first I've heard of that. I would like to know more, if that assertion can be verified.

I think one of these statements is not like the others. (in that it is wrong)

Amazon emails are part of the case:

Quote:

”I guess what we never figured in was the idea that five publishers would band together and insist on receiving worse terms,” the email said. “And then Amzn would be ‘cornered’ into accepting them.”“Hysterical, isn’t it?” the Amazon executive replied. “Jedi Mind Tricks here in Seattle.”/

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

Yeah, even $10 is more than I want to pay, most of the time. I find that $5-6 is much more comfortable for me, and I will often skip $8 books, unless it's part of a series I'm already reading or from an author I know I'm going to like.

For those who keep asserting that Amazon was selling below cost: No, they were investigated by this by the DOJ already. Some books were sold below cost. Others were sold at a profit. On balance, Amazon's ebook business was profitable from day one. The books sold at a loss are called 'loss leaders' and that is a standard retailing practice used by every retailer practically forever. What matters is if Amazon's ebook business was profitable, if it was then nothing they were doing was predator as others could have competed with that model and also made a profit.

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

Yeah, even $10 is more than I want to pay, most of the time. I find that $5-6 is much more comfortable for me, and I will often skip $8 books, unless it's part of a series I'm already reading or from an author I know I'm going to like.

... I find it ridiculous that back catalogs are sold for higher than their mass-market paperback price, not to mention that I can easily find most of those titles at used bookstores for much less and then, can even resell to recoup some of an already cheap price.

It's not ridiculous at all, from the retailer's standpoint. It just happens that their needs and yours don't align in this instance: books are physical inventory and take up space, so if they're sitting on a shelf somewhere and not selling, the retailer can use that space for something more profitable. The way to do get rid of these books is to dump the price until they all sell. The ebook prices don't go down when this happens because that wouldn't clear out physical inventory.

The sad thing is 9.99 was too high too. If most ebooks cost 12-15, I'd have a hundred or two less in my Calibre library. Baen books used to sell all their digital books at $6 each and that was a very respectable impulse buy price for a no drm multiformat book. The kindle daily deal price of .99 or 1.99 is even better of course, but the selection is sadly lacking.

Of course I'm a voracious reader and go through most books in ~3 hours. Maybe if you got a lot more time out of each book it wouldnt be so bad.

Yeah, even $10 is more than I want to pay, most of the time. I find that $5-6 is much more comfortable for me, and I will often skip $8 books, unless it's part of a series I'm already reading or from an author I know I'm going to like.

Is Apple's unwillingness to admit mistakes a product of their PR strategy or delusion?

Just like the iPhone 4 antenna, sometimes it's just better to apologize, solve, and move on.

I wonder if Apple is doing the same thing in other areas besides books. That would mean that admitting guilt or losing here would subject their other business practices to similar scrutiny. They'd be closely watched by the government going forward - just as Microsoft was and probably still is after the anti-trust case.

I can't imagine that books are a huge part of Apple's success, especially given their well established competition. Why would one buy a book from Apple when they can buy it from Amazon and read it not only on their iPad, but also on a Kindle device, Mac or Windows PC, phone, etc. This in particular makes me think they're more worried about an investigation carrying over into other products beyond books.

The only thing I can think of is that Apple perceives this case to be a direct threat on the agency model itself, which is basically the core of it's digital business through iTunes. Guilt or innocence aside, I don't see why Apple would fight this rather than settle unless it directly threatened their entire way of doing business.

The only question is if apple got all this through illegal collusion. The government has to show that they did that. But at least from the Jobs Murdock emails it seems that the negotiations were one-on-one.

I hope the DOJ has more than that. Maybe well get some wiretaps or grainy video

Do you have a source concerning Amazon pursuing the agency model? I've been following this story for awhile and this is the first I've heard of that. I would like to know more, if that assertion can be verified.

Without holding myself out as the expert, it's my belief that it's simply not true that Amazon wanted agency pricing. If Amazon wanted the agency model, why did they start dropping the prices of Kindle books the minute the publishers started settling?

It seems to me that agency pricing benefitted all the retailers except Amazon - what possible reason would they have for favoring agency pricing, when previously they had full control over e-book pricing anyway?

I can't imagine that books are a huge part of Apple's success, especially given their well established competition. Why would one buy a book from Apple when they can buy it from Amazon and read it not only on their iPad, but also on a Kindle device, Mac or Windows PC, phone, etc. This in particular makes me think they're more worried about an investigation carrying over into other products beyond books.

The thing is though that many Apple users are perfectly happy to read their iBooks on their iDevice. Why would they want to use another device when their iOS device does what they want? I actually tried to use your arguments on my boss a while back and his main reason for buying ebooks from Apple instead of Amazon was because he likes the fact that the purchase is seamless and handled just like any normal iTunes type transaction. Since Apple doesn't allow in-app purchases on iOS without giving Apple their 30% cut, it is much more complicated to purchase an ebook from Amazon. To buy from Amazon on an iDevice you have to leave the Kindle app and then long in to Amazon in Safari and make the purchase there and then finally go back to the Kindle app to read the book. It was too much of a pain in his mind.

How is it that Apple thinks they can win this? Haven't all of the publishers they colluded with already settled and by doing so admitted at least some validity to the claim?

There is long standing legal precedent that what is said in negotiations is completely negated if an agreement is reached and signed by the relevant parties. In that case the signed agreements rule. What is said in negotiations, if the agreement is clear, becomes irrelevant.

In it's agreements with the publishers, Apple gave up ALL control of pricing to the publishers. The agreements just guaranteed that Apple's customers shall be treated as the "best customers" (Note this IS NOT the wrongly referenced "Most Favored Nation" concept!) of the publishers. In this case, Apple's customers would be guaranteed as good a price as the publishers allowed anyone to have. It did not matter if the publishers set the price at $19.99 or $9.99 or $0.99 or FREE. If the publishers were OK with Amazon or B&N or anyone else selling a book for $9.99 (or for that matter giving a book away for free) then the publishers had to allow Apple to give the book away for free too.

And as an aside on the "best customer" issue... The U.S. Government has been invoking the "best customer" concept for many, many years in many of its contracts. In many, many cases when you sell items to the U.S. Government you must guarantee that you will give the U.S. Government as good a price as you give to anyone else and the as good a set of terms and conditions as you give to anyone else. You get to sell with any price and terms and conditions you want, but the U.S. Government is guaranteed that "best customer" status. If the U.S. Government can demand "best customer" status in its dealings with companies and individuals then why can't Apple's customers get the same type of benefit? (And, just so you know, I've seen "best customer" clauses in purely commercial contracts too -- with no one getting hauled into court by the DOJ over it.)

A corollary to this was that Apple gets 30% of whatever the publishers said was or will be, the selling price. If the selling price, set by the publisher, is $10 then Apple gets $3. If the selling price is FREE then Apple gets NOTHING.

In a truly atypical move for Apple, Apple gave up ALL control over pricing of the books. The final agreements effectively state, "You, the publisher sets all selling prices." (Contrast to the iTunes songs setup in the early days where Apple forced all songs to be sold for $0.99. The DOJ didn't step in on that one even though Apple did force the pricing -- simply because Amazon and others didn't whine to the DOJ because they feared losing their control over the industry as Amazon and others had no control to lose back then. Different story with Amazon now!)

Since, by long standing legal precedent, the final agreement is the ultimate item, and that agreement in no way requires the publishers to raise prices (remember that the publishers could tell Apple to give them away for free if the publishers so desired) then how is Apple able to force, in any way, a price increase?

From everything I have read, there exists no agreement anywhere stating that Apple *required* the publishers to raise prices. There is no document signed by the parties where Apple says, "No matter what price point Amazon or B&N or anyone else is using, we, Apple, will keep the prices artificially high and you publishers must agree to this." Unless the DOJ can produce such a signed agreement, the DOJ should lose on this hands down.

Finally, just because all the publishers caved because they thought it was too costly (both in terms of public opinion and dollars) to fight it, does not mean that they colluded. And even if they did collude to raise prices, they were the ones that had absolute final say as to what the prices were, not Apple. So, yet again, even IF there was collusion among the publishers, how is it that Apple forced them to raise prices?

”I guess what we never figured in was the idea that five publishers would band together and insist on receiving worse terms,” the email said. “And then Amzn would be ‘cornered’ into accepting them.”“Hysterical, isn’t it?” the Amazon executive replied. “Jedi Mind Tricks here in Seattle.”

Considering that the end result was the list price going down and the publishers getting a slightly lower wholesale cut, it would appear that the publishers got a worse deal and that Amazon also made more money in the bargain (since they could no longer charge $10 for a $20 book.)

However, this is also clearly a case of spin doctoring, since the iBooks store surely cut in to Amazon's sales. That can't have hurt too badly in the long run, though, since the Kindle store is now selling more electronic than paper books.

I think one of these statements is not like the others. (in that it is wrong)

Amazon emails are part of the case:

Quote:

”I guess what we never figured in was the idea that five publishers would band together and insist on receiving worse terms,” the email said. “And then Amzn would be ‘cornered’ into accepting them.”“Hysterical, isn’t it?” the Amazon executive replied. “Jedi Mind Tricks here in Seattle.”/

You are deluding yourself if you think that somehow negates the collusion.